Scotia Latin American Fund Annual Management Report of Fund Performance For the period ended December 31, 2011 AM 64 E This annual management report of fund performance contains financial highlights, but does not contain the complete annual financial statements of the fund. You can get a copy of the annual financial statements at your request, and at no cost, by calling toll-free 1 800 268-9269, or by asking your mutual fund representative. You can also write to us at Scotia Asset Management, Scotia Plaza, 52nd Floor, 40 King Street West, Toronto, Ontario M5H 1H1, or download from www.scotiafunds.com or www.sedar.com. You may also contact us using one of these methods to request a copy of the fund s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. In this document, we, us, our and the Manager refers to Scotia Asset Management L.P. ( SAM ) and fund refers to the Scotia Latin American Fund. This report may contain forward-looking statements about the fund. Such statements are predictive in nature and depend upon or refer to future events or conditions and may include such words as expects, plans, anticipates, believes, estimates or other similar expressions. In addition, any statement regarding future performance, strategies, prospects, action or plans is also a forward-looking statement. Forward-looking statements are subject to known and unknown risks and uncertainties and other factors that may cause actual results, performance, events, activity and achievements to differ materially from those expressed or implied by such statements. Such factors include general economic, political and market conditions, interest and foreign exchange rates, regulatory or judicial proceedings, technological change and catastrophic events. You should consider these and other factors carefully before making any investment decisions and before relying on forward-looking statements. We have no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise. Management Discussion of Fund Performance Investment Objectives and Strategies The fund s objective is long-term capital growth. It invests primarily in a broad range of high quality equity securities of companies in Latin America. The portfolio advisor uses fundamental analysis to identify investments that have the potential for above-average growth over the long term. This involves evaluating the financial condition and management of each company, as well as its industry and the economy. The fund s assets are diversified by industry and company to help reduce risk. The fund can invest up to 75% of its assets in a single country. Risk The overall risks of investing in the fund remain as discussed in its simplified prospectus. The fund remains suitable for investors who want the growth potential of investing in equity securities of Latin American companies, who can accept higher risk and who are investing for the long term. Results of Operations Over the review period, the fund s Series A units returned 27.78% compared to a 17.14% return for the MSCI EM Latin America Index (in Canadian dollars). In contrast to the index, the fund s return is after the deduction of fees and expenses. Any difference between the performance of Series A units and other series of the fund is the result of the different management fees charged to, and operating expenses recovered from, each series. Please see the Past Performance section for the performance returns of the fund s other series. The review period was generally a disappointing time for global equity investors as fear about the European sovereign debt crisis spreading to the eurozone s larger members resulted in a high level of risk aversion and market volatility. Increased uncertainty over global economic growth and the impact a severe recession in Europe could have on the rest of the world overshadowed generally positive data pointing to a U.S. economic recovery. Equities in emerging markets were also quite volatile, with concern over growing inflation, particularly in China, leading to questions about the strength of the economies of the emerging markets. By the end of the review period, it appeared China s economy one of the world s growth engines was at risk of slowing in response to that government s moves to curb China s inflation. The equity markets of Latin America had negative returns over the period, which was largely driven by weakness out of Brazil. The weakness of the commodities sector also detracted from the performance of Latin America s equity markets. Signs of a slowing global economy drove down commodities prices through much of the year. Conversely, oil prices rose in response to the political unrest in the Middle East and North Africa during the period, which contributed to the region s equity market performance. Gold prices rose as well, as that commodity continued to act as a hedge against inflation. The fund underperformed its benchmark over the review period. Most of the fund s underperformance occurred in the second half of the year when equity markets became increasingly volatile. Both stock selection and sector allocation contributed to the fund s underperformance over the review period. The most significant detractors from fund performance 1
over the period included the fund s overweight position in the materials sector and its underweight position in the telecommunications sector. Top individual contributors to performance included Brazilian estate firm Tecnisa S.A., as well as Brazilian watch company Technos S.A. Significant individual detractors from performance over the review period included Brazilian furniture and electronics retailer Magazine Luiza S.A. and Brazilian fashion retailer Lojas Renner S.A. Over the review period, the fund experienced net redemptions of $33,244,540. Recent Developments Effective November 24, 2011, the designation of the units of the fund has been changed from class to series ; namely, Class A became Series A, Class F became Series F, and Class I became Series I. Effective April 30, 2012, PricewaterhouseCoopers LLP will become the auditor of the fund replacing Ernst & Young LLP. Moving into 2012, the portfolio advisor remains extremely positive on the region s economic outlook over the medium term, while aware of the short-term headwinds created by Europe s volatile sovereign debt situation and the potential weakening of China s economy. Contributing to the portfolio advisor s positive outlook are what the portfolio advisor believes are many undervalued companies in Latin America, as well as the tremendous array of tools and resources available to local policymakers (governments and central banks) to help drive economic growth. As countries return to a focus on economic growth, these policymakers will likely take advantage of the fiscal and monetary resources available to them to ensure that any slowdown in their domestic economic growth is short-lived. This also applies to many of this region s Asian peers. Going into year-end the portfolio advisor noted signs that, with China s inflation now appearing to be tapering off, China s policymakers are reducing the country s reserve requirements and encouraging its banks to lend more, which should be positive for global economic growth. Heading into 2012, the portfolio advisor plans to focus the fund s investment in Brazil, while taking a more defensive stance with regard to Mexico. If U.S. economic data continues to improve, however, the portfolio advisor may adjust the fund s positioning within Mexico. Future Accounting Changes Effective January 1, 2011, International Financial Reporting Standards ( IFRS ) replaced Canadian standards and interpretations as Canadian GAAP for publicly accountable enterprises, which include the Fund. On December 12, 2011, the Accounting Standards Board ( AcSB ) made the decision to extend the deferral of the mandatory adoption of IFRS by investment companies for an additional year to January 1, 2014. This extends the previous two-year deferral of IFRS to three years as compared to other publicly accountable entities. The deferral is to provide time for the International Accounting Standards Board ( IASB ) to finalize its guidance on investment entities and that a final standard could be issued after January 1, 2013, the previously established changeover date for investment companies in Canada. Entities currently applying Accounting Guideline 18, Investment Companies can continue to apply existing Canadian standards in Part V of the CICA Handbook Accounting until fiscal years beginning on or after January 1, 2014. In light of this decision, the Manager will defer the first-time adoption of IFRS until fiscal year beginning on or after January 1, 2014. The Manager has commenced the development of a changeover plan to meet the implementation date. The key elements of the plan include identifying differences between the Fund s current accounting policies and those the Fund expects to apply under IFRS, as well as any accounting policy and implementation decisions and their resulting impact, if any, on the Net Assets or Net Asset Value of the Fund. On August 25, 2011, the IASB issued an exposure draft proposing that investment entities will be exempted from consolidating their controlled investments under IFRS 10. The Fund expects to meet the proposed criteria to qualify as investment entities and would measure all controlled investments at fair value with changes in fair value recognized through profit or loss. In light of this exposure draft, the major qualitative impacts noted as of December 31, 2011 would be the addition of a statement of cash flows, the impact of classification of puttable instruments, the impact of reporting future income tax assets or liabilities when applicable, and additional note disclosures. The Manager has presently determined that there will be no quantitative impact on the Net Asset Value per Unit of each Fund Series resulting from the changeover to IFRS. However, this present determination is subject to change resulting from the issuance of new standards or new interpretations of existing standards. Related Party Transactions We are the trustee, manager, registrar and transfer agent of the fund. The fund pays us a management fee, which may vary for each series of units of the fund. The Bank of Nova Scotia ( Scotiabank ), the parent company of the manager, earns fees for of providing custodial services, including safekeeping and administrative services and unitholder record-keeping services to the fund. Our affiliates may earn fees and spreads in connection with various services provided to, or transactions with, the fund, such as banking, brokerage, securities lending, foreign exchange and derivatives transactions. We, or our affiliates, may earn a foreign exchange spread when unitholders switch between units of funds denominated in different currencies. The Fund also maintains bank accounts and over-draft provisions with Scotiabank for which Scotiabank may earn a fee. 2
For certain series of units of the fund, Scotia Securities Inc., a wholly-owned subsidiary of Scotiabank, is the principal distributor for which it is paid a trailer commission by SAM. Units of the funds are also distributed through brokers and dealers, including Scotia Capital Inc. ( SCI ), DWM Securities Inc. ( DWMI ) and Dundee Private Investors Inc. ( DPII ) which are wholly-owned subsidiaries of Scotiabank. SCI, DWMI and DPII, like other dealers, are paid a trailer commission by SAM for distributing certain series of units of the fund. Trailer commissions are paid by SAM out of the management fees it receives from the fund and are based on the average value of assets held by each dealer. SAM has established an independent review committee ( IRC ) which acts as an impartial and independent committee to review and provide recommendations or, in certain cases, approvals respecting any conflict of interest matters referred to it by SAM. The IRC prepares, at least annually, a report of its activities to unitholders of the fund. The report is available on the ScotiaFunds website at www.scotiafunds.com or at the unitholder s request at no cost by contacting SAM (see front page). SAM and the fund relied on standing instructions from the IRC in respect of one or more of the following types of transactions: Investing in or holding securities of related issuer, including Scotiabank; Trades in securities with SCI or parties related to the manager or the portfolio advisor, where SCI or such related parties act as principal; Investing in securities of an issuer during, or for 60 days after, the period in which SCI, or a related entity to the portfolio advisor, acted as an underwriter in the offering of those securities; and Purchases or sales of securities from or to another investment fund managed by us (referred to as Inter Fund Trading ). The applicable standing instructions require that investment decisions relating to the above types of transactions (i) are made free from any influence by us or any entity related to us and without taking in account any considerations relevant to us or any entity related to us; (ii) represent the business judgment of the portfolio advisor uninfluenced by any consideration other than the best interests of the funds; (iii) are in compliance with our policies; and (iv) achieve a fair and reasonable result for the fund. Financial Highlights The following tables show selected key financial information about the fund and are intended to help you understand the fund s financial performance over each of the past five years ended December 31. The Fund s Net Assets per Unit (1) Series A Units Net Assets, beginning of year $ 30.10 29.01 16.80 35.35 33.21 Increase (decrease) from operations: Total revenue $ 0.79 0.80 0.59 0.54 0.83 Total expenses $ (0.75) (0.88) (0.78) (0.83) (1.07) Realized gains (losses) for the period $ 0.82 1.10 1.14 (4.54) 5.76 Unrealized gains (losses) for the period $ (9.32) (0.04) 11.22 (14.29) (0.60) Total increase (decrease) from operations (2) $ (8.46) 0.98 12.17 (19.12) 4.92 Distributions: From net investment income (excluding dividends) $ From dividends $ (0.35) (0.03) From capital gains $ (2.94) Return of capital $ Total Annual Distributions (3) $ (0.35) (2.97) Net assets at December 31st of year shown (4) $ 21.30 30.10 29.01 16.80 35.35 Series F Units Net Assets, beginning of year $ 30.74 29.43 16.96 35.42 33.14 Increase (decrease) from operations: Total revenue $ 0.81 0.82 0.60 0.54 0.83 Total expenses $ (0.59) (0.72) (0.62) (0.60) (0.78) Realized gains (losses) for the period $ 0.85 1.12 1.16 (4.57) 5.80 Unrealized gains (losses) for the period $ (9.74) 0.66 11.23 (13.76) (0.94) Total increase (decrease) from operations (2) $ (8.67) 1.88 12.37 (18.39) 4.91 Distributions: From net investment income (excluding dividends) $ From dividends $ (0.55) (0.16) From capital gains $ (2.95) Return of capital $ Total Annual Distributions (3) $ (0.55) (3.11) Net assets at December 31st of year shown (4) $ 21.72 30.74 29.43 16.96 35.42 From time to time, the fund may enter into portfolio securities transactions with SCI or other dealers in whom Scotiabank has a significant interest (the Related Dealers ). These Related Dealers may earn commissions or spreads provided that such trades are made on terms and conditions that are comparable to non-related brokers or dealers. 3
Series I Units Net Assets, beginning of year $ 31.88 30.13 17.18 35.36 33.18 Increase (decrease) from operations: Total revenue $ 0.69 0.84 0.51 0.55 0.84 Total expenses $ (0.13) (0.24) (0.24) (0.17) (0.25) Realized gains (losses) for the period $ 0.72 1.15 0.98 (4.59) 5.82 Unrealized gains (losses) for the period $ (10.10) 0.22 14.13 (12.15) 0.07 Total increase (decrease) from operations (2) $ (8.82) 1.97 15.38 (16.36) 6.48 Distributions: From net investment income (excluding dividends) $ From dividends $ (0.74) (0.11) (0.79) From capital gains $ (3.00) Return of capital $ Total Annual Distributions (3) $ (0.74) (0.11) (3.79) Net assets at December 31st of year shown (4) $ 22.73 31.88 30.13 17.18 35.36 * The start date for Series I units was June 20. (1) This information is derived from the fund s audited annual financial statements. The net assets per security presented in the financial statements differs from the net asset value calculated for fund pricing purposes. This difference is due to the requirements of generally accepted accounting principles ( GAAP ), including CICA Handbook Section 3855, and may result in a different valuation of securities held by the fund in accordance with GAAP than the market value used to determine net asset value of the fund for the purchase, switch and redemption of the fund s units ( Pricing NAV ). The Pricing NAV per unit at the end of the period is disclosed in Ratios and Supplemental Data. (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. (3) Distributions were paid in cash/reinvested in additional units of the fund, or both. (4) The net assets per unit at period end is not a cumulative amount but, rather, the value of the fund s units, in accordance with GAAP, as at the fund s period end. Ratios and Supplemental Data Series A Units Total net asset value (000 s) (1) $ 52,250 79,679 80,009 44,296 90,621 Number of units outstanding (000 s) (1) 2,442 2,646 2,748 2,634 2,564 Management expense ratio (2) % 2.69 2.54 2.56 2.47 2.54 Management expense ratio before waivers or absorptions (2) % 3.19 2.54 2.57 2.52 2.54 Trading expense ratio (3) % 0.19 0.61 0.84 0.33 0.43 Portfolio turnover rate (4) % 36.15 141.46 183.56 60.59 66.21 Net asset value per unit $ 21.40 30.12 29.12 16.82 35.34 Series F Units Total net asset value (000 s) (1) $ 69 126 105 59 143 Number of units outstanding (000 s) (1) 3 4 4 3 4 Management expense ratio (2) % 2.01 1.91 1.82 1.69 1.74 Management expense ratio before waivers or absorptions (2) % 5.87 3.90 4.95 3.66 2.95 Trading expense ratio (3) % 0.19 0.61 0.84 0.33 0.43 Portfolio turnover rate (4) % 36.15 141.46 183.56 60.59 66.21 Net asset value per unit $ 21.82 30.76 29.55 16.98 35.41 Series I Units Total net asset value (000 s) (1) $ 2,171 34,062 38,948 2,923 3,432 Number of units outstanding (000 s) (1) 95 1,068 1,288 170 97 Management expense ratio (2) % 0.28 0.21 0.24 0.27 0.26 Management expense ratio before waivers or absorptions (2) % 0.28 0.21 0.24 0.29 0.29 Trading expense ratio (3) % 0.19 0.61 0.84 0.33 0.43 Portfolio turnover rate (4) % 36.15 141.46 183.56 60.59 66.21 Net asset value per unit $ 22.83 31.90 30.24 17.20 35.36 (1) (2) (3) (4) This information is provided as at December 31st end of the year shown. Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of the daily average net asset value during the period. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of the daily average net asset value during the period. The fund s portfolio turnover rate indicates how actively the fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the fund buying and selling all of the securities in its portfolio once in the course of the year. The higher a fund s portfolio turnover rate in a year, the greater the trading costs payable by the fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. Management Fees The management fee for each series is calculated as a percentage of its daily net asset value and is accrued daily. The management fees cover the costs of managing the fund, allow us to arrange to provide investment analysis, recommendations and investment decision making for the fund, allow us to make brokerage arrangements for the purchase and sale of the fund s portfolio securities and to provide or arrange to provide other services. The breakdown of the services received in consideration of the management fees for each series, as a percentage of the management fees, are as follows: Maximum Management Fees (%) Breakdown of Services Dealer Compensation (%) Other* (%) Series A 2.50 6.68 93.32 Series F 1.25 100 * Includes all costs related to management, trustee, investment advisory services, general administration and profit. Past Performance The performance shown assumes that all distributions made by the fund in the periods shown were reinvested in additional units of the fund. If you hold the fund outside of a registered plan, you will be taxed on these distributions. The performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns. How the fund has performed in the past does not necessarily indicate how it will perform in the future. On March 17, 2003, TCW Investment Management Company was appointed as the portfolio advisor to the fund. Prior to March 17, 2003, Scotia Cassels Investment Counsel Limited was the portfolio advisor to the fund. These changes could 4
have materially affected the performance of the fund during the performance measurement periods. All rates of return are calculated based on Pricing NAV and are in Canadian dollars unless stated otherwise. Year-by-Year Returns This chart shows the fund s performance, which changes from year to year. It shows in percentage terms how much an investment held on January 1, or held commencing from start of series in each year, would have increased or decreased by December 31. % Series A Units 100 80 73.15% 60 40 43.96% 43.82% 31.34% 25.32% 20 15.02% 0 3.43% -20-40 -20.54% -27.78% -60-80 2002 2003 2004 2005 2006 2007-52.42% 2008 2009 2010 2011 % Series F Units 100 80 74.04% 60 40 43.52% 45.70% 20 13.29% 15.92% 0 4.08% -20-40 -27.31% -60-80 2004* 2005 2006 2007-52.06% 2008 2009 2010 2011 * Feb. 27 Dec. 31 % Series I Units 100 80 75.87% 60 46.98% 40 28.62% 20 17.68% 5.84% 0-20 -40-26.10% -60-80 2005* 2006 2007-51.36% 2008 2009 2010 2011 * Jun. 20 Dec. 31 Annual Compound Returns This table shows the fund s annual compound returns compared to the MSCI EM Latin America Index, for the periods shown ending December 31, 2011. since 1 year 3 year 5 year 10 year inception 1 Series A Units % -27.78 8.95-6.68 6.72 MSCI EM Latin America Index % -17.14 16.09 4.03 13.68 Series F Units % -27.31 9.60-6.05 7.21 MSCI EM Latin America Index % -17.14 16.09 4.03 15.12 Series I Units % -26.10 11.22-4.67 6.29 MSCI EM Latin America Index % -17.14 16.09 4.03 13.55 1 Inception Dates: Series F Units Feb 27, 2004, Series I Units Jun 20, 2005. The MSCI EM Latin America Index measures the total return of equity securities in the Latin American region. As of June 2007, the index included Argentina, Brazil, Chile, Colombia, Mexico and Peru. Please see the Results of Operations section for a discussion of the fund s performance relative to the index. Summary of Investment Portfolio (as at December 31, 2011) This is a breakdown of the fund s investments and a list of up to 25 of its largest holdings. The holdings will change as the portfolio advisor buys and sells securities. You can obtain a list of portfolio holdings on a quarterly basis by calling 1 800 268-9269, or by visiting www.scotiafunds.com. Geographic Mix (1) % of net asset value (2) Brazil 66.2 Mexico 18.0 Chile 8.3 United States 4.2 Canada 1.7 (1) 1.6% of the fund s assets are held in Cash, Other Assets and Liabilities. (2) Based on Pricing NAV. 5
Top Holdings Issuer % of net asset value (1) Vale SA ADR, Preference 8.8 Bradespar SA, Preference 7.4 Itau Unibanco Holding SA, Preference 6.6 Grupo Mexico SA -Ser B 5.2 Petroleo Brasileriro SA, Preference 4.7 Lojas Renner SA 4.5 America Movil Sab De CV Mexico 3.8 Petroleo Brasileriro SA, Preference 3.1 Grupo Financiero Banorte SAB de CV, Series O 3.0 QGEP Participacoes SA 3.0 OGX Petroleo e Gas Participacoes SA 2.8 Companhia de Concessoes Rodoviarias 2.6 BR Malls Participacoes 2.5 Itau Unibanco Holding SA, Preference 2.5 OHL Mexico SAB de CV 2.4 Brasil Telecom SA ADR 2.3 Technos SA 2.2 Banco Bradesco SA ADR 2.2 Bancolombia SA ADR 2.0 Centrais Eletricas Brasilier SA 1.9 Raia Drogasil SA 1.8 America Movil SAB de CV, Series L, ADR 1.8 Magazine Luiza SA 1.7 Cyrela Brazil Realty SA 1.7 Pacific Rubiales Energy Corporation 1.7 Total Net Asset Value (000 s) $54,490 (1) Based on Pricing NAV. 6
7
» Registered trademark of The Bank of Nova Scotia, used under licence. 8